Shari‛ah perspective of stipulating profit or loss sharing ratio at inception

In joint ventures on shirkah and mudārabah, the knowledge of profit / loss sharing ratio is imperative at the inception of the contract. 

 Although there appears to be some difference on whether it is necessary to stipulate these aspects in the agreement, a perusal of accepted works of the schools would reveal that where this is not required, it is due to the fact that certain schools do not recognize the possibility of any variation occurring pertaining to these.


  • Thus, the Shāfi‛i school holds that profit (as well as loss) in shirkah would necessarily be owned by the partners in proportion to their respective capitals, irrespective of whether this fact is stipulated in the agreement or not.  If any condition is agreed to the contrary, the contract becomes invalid.


  • The position of the Māliki school in this respect is similar, who also state that labor, too, would be contributed by the parties in proportion to their capital investment, even when these aspects are not stipulated in the contract.


  •  Hanbali jurists, who do not consider it necessary that profits be divided on the basis of capital contribution, hold that when partners in a contract of shirkah do not stipulate the ratio of profit distribution, it will be divided according to the capital investment ratio.


With regard to mudārabah, all schools hold it necessary that the proportion of each partner‟s profit should be known at the inception of the contract, so much so that ignorance of this aspect results in the invalidity of the contract.  Where general reference is made in the contract to profits being shared by the parties without specifying the exact proportion of each contractor, all schools of Islamic law regard the contract valid, as reference to sharing is taken to denote equal entitlement to profits among the partners.  Therefore, profits are divided equally between the financier and the fund manager in this instance.

It is clear from the above that all schools of Islamic law consider it necessary that the profit sharing ratio be clearly fixed at the outset of the equity relationship.  The emphasis placed on this issue is justified in view of the fact that sharing of profit (and loss) happens to lie at the foundation of equity relationships.  

 reference:  
Measures Affecting the Agreed Profit Sharing Ratio in Joint Ventures Financed by Islamic Banks: a Shari’ah Based Evaluation by Muhammad Abdurrahman Sadique

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